Taking Stock: Indonesia’s Tax Sector

The tax system has been in the spotlight during the administration of President Joko Widodo, which has faced the challenges of boosting tax revenue while struggling with administrative and capacity issues. Big headlines have included the tax amnesty program and tax revenue targets.

In 2016, the tax amnesty was launched to address critical needs for boosting tax revenue. The program, dubbed by some as hugely successful, nonetheless left many questions over its strategic benefit. In 2017, the government launched a tax reform initiative to continue the momentum for the betterment of Indonesia’s taxation system.

The tax amnesty program has ended, and the reform period is entering its first year. But the question remains: how do those programs affect overall reform of the tax sector?

To answer this, AmCham Indonesia reached out to Yustinus Prastowo, a leading expert on Indonesia’s tax policy. Yustinus is the Executive Director of the Center of Indonesian Taxation Analysis (CITA), a think-thank specializing in Indonesian taxation policy. He is also one of the advisors to Indonesia’s tax reform team.

AmCham Indonesia: What is the Center for Indonesian Taxation Analysis (CITA)?

Yustinus Prastowo: The organization was formally established in 2014. At that time Indonesia did not have a proper counterpart for tax policy discourse. We had tax consultants, but they were more to help taxpayers settle their taxes. We had a university, but it was more to do with tax education. No single entity was focusing on advocating on tax policy.

CITA was established to be an independent organization and a bridge between the public and private sectors. We support the government when it has good programs, giving input on tax policies and helping address noncompliance from the private sector. However, when we know private entities are treated unfairly, we also try to help protect them. We dedicated CITA to promote better tax policy so the state can get it right, based on the law, in the right way, while taxpayers also get proper rewards for what they’ve paid for.

What was your take in the tax amnesty program?

We were actively involved in the process. We supported the initiative as we saw 2016 was a very challenging situation, it was gridlock. The economy needed incentives to grow further, and as a consequence there was a high target set for the Directorate General of Taxation, and it was inevitably pushed to “chase” taxpayers to reach the target. It would have been a dangerous situation if we did not have a moratorium to mitigate the situation.

However, at the very beginning, we voiced our concerns that the usual problem for Indonesian governments on tax is not about implementation, but more on monitoring and evaluation. We should be very careful on how to administer the post-amnesty [period]. Unfortunately, that was what it was not doing.

After the tax amnesty, which was quite successful, the government was confused over what to do next. It did not have a clear roadmap, nor implementing regulations to support the post-amnesty phase. There were a lot of questions about reform, but how should we do it? How could we utilize data from the tax amnesty? There was a complete vacuum of inaction for five months. Government Regulation No. 36 of 2017/GR 36 on income tax was released later, but it was too late. The government was not sure how to implement GR 36 as the trust level was low and it may have led to rejection, and it missed out on the momentum. We are still wondering how Indonesia can make the best out of the tax amnesty.

Ideally, what can the government get from the tax amnesty?

The amnesty can be a bridge to a transparent taxation system. If we use the stick-and-carrot analogy, there will be an automatic exchange of information this year that will allow Indonesia to exchange tax information with tax authorities worldwide, that’s the “stick”. But we are aware that we can’t just do it right away or the economy will collapse socially and politically. It’s been too long with people hiding their wealth and the government ignoring noncompliance. That’s why to mitigate the risk of rejection, we should give a “carrot,” which is the amnesty.

We achieved more than 100 percent of the asset declaration target, but less than 15 percent for repatriation, why was that, in your view?

Repatriation is about people bringing their money back to Indonesia. It may be for investment, for saving, but it really depends on their trust in the financial system. Is it secure enough? Is it competitive for investment? Is the political and social situation conducive? I think the right answers to these questions were not given by the government at the time.

Money does not care about ideology or religion, it only knows about profit. If people find that it is not profitable and there is no guarantee of stability and certainty, they won’t repatriate their funds. That’s actually the logic of investment. At the time, there were also the movements of 4-11 and 2-12 [the mass protests during the Jakarta gubernatorial elections], which certainly affected the political situation, and led to the government focusing on political issues rather than the economy.

There was also no policy packaging. If we make the analogy for repatriation as “selling,” we don’t actually know what we are selling. We should have policy packages and incentives coordinated by regional governments, state-owned enterprises and the banking sector, but we were not doing it. That was why not a lot of people were “buying” it.

What does the high achievement of asset declaration mean for the country?

From the Rp4,800 trillion target, only Rp1,000 trillion came from foreign asset declaration. These high numbers came from not a small number of people, around one million people. This means two things.

First, it shows how inequality really exists in this country. Only a few people actually possess the overall wealth of the country. Second, it just shows the tip of the iceberg – that Indonesian authorities cannot handle noncompliance inside the country. It further shows how weak our system is.

We should also be careful. The declarations may contain data that is not new. For instance, we have money in banks or the stock market that has already been taxed, but not yet reported.

What could have been done better for the tax amnesty?

The planning stage should have been better. At the time we proposed a few steps for the president’s team from pre-amnesty to post amnesty, yet somehow they did not do it.

The first focus should be on administration – we should prepare the IT system better to support the program. Second, we should prepare all implementing regulations, including regulations related to post-amnesty, at the very beginning. The third is political communication on the program, the policy packaging and counter arguments for possible constitutional court challenges. The last is reform. What kind of reform do we want to have after the program? Those are the things we should have prepared in the beginning, not after the tax amnesty program was finalized.

Another issue consistently cropping up is the tax revenue target. Do you think the government is setting the target correctly?

We agree that Indonesia has big potential in terms of tax revenue. But somehow we do not view this in the right way. What the government does now is to increase the target, to increase the effort, because it believes we still have big potential. In developed countries, that is not the approach they take. They are not setting targets, instead they focus on reducing the gap between the tax target and realization, and try to reduce the gap year by year to reach the ideal level.

Indonesia should start refocusing its efforts to minimize the gap and calculate the exact potential tax figure. What we are seeing now is tax officers working “aggressively” because they work to achieve the tax potential. We should start to measure the gap, analyze where the biggest gap is, is it in a specific sector? How do we reduce the gap in that sector?

Year by year we see the target keeps increasing, while the capacity may not always increase. We should also start to measure how capacity building can reduce the gap. For instance, how much of a percentage gap can be reduced by improving the administration system? How can IT revitalization affect the percentage of tax base growth? That’s what the focus should be.

The tax revenue issue has been going on for years now, why does it keep recurring? Do you think it is also affected by the government’s drive to build infrastructure, which requires big spending?

When Jokowi took office, the administration found that the tax potential was really big. But again, we can’t realize all the potential in a short time. We pushed spending – especially for infrastructure – while the economy was not in a position to allow us to be aggressive. To my understanding, the purpose of tax is to fill the gap, what is the deficit and how can tax help reduce that. When we do not follow the right thinking, the damage will be to the taxpayers, especially to those who already comply. Why? Because when a tax officer’s KPI [key performance indicator] is to achieve the tax target, they prefer to do what they are able to do to reach the target in such a limited time, which is to reach out to the ones who have already in the past been proven to be paying their tax.

The government is already rolling out its tax reform program, do you think it is on the right track?

I really appreciate the intention for reform, the participation is inclusive. However, what I saw from the process is the reform lacks vision. The vision is not really clear, especially on what is to be achieved. A clear vision will be a clear tax policy, and that will be the reference for the law at the administrative levels. The team has been progressing for one year yet not a single quick win has been produced. I think a quick win is important so it can give a signal to the public that reform is happening.

In my view, there are two quick win options for the government. The first is to change the law on taxation. However, if that is difficult, we can start by inventorying problematic regulations [government, presidential and ministerial regulations] and revise them.

What other steps should the government take to regain the momentum?

I think the most crucial priority is to regain the trust of the people. Trust can only be achieved through credible policy from the tax authority. I think for now the government needs to step back a bit, we should not – for this current time – be chasing those who have already joined the tax amnesty program. Let us first focus on those who did not join the program in the first place. What we see is a wave of rejection whenever tax authorities release a new policy. It is simply because of the trust issue.

I think we should also utilize a system to minimize rejection. A system will not implement tax policy selectively. We should also implement compliance risk management (CRM), where a system can check those who have a high risk of noncompliance, and direct tax officers for monitoring efforts, while those with a low risk of noncompliance should be rewarded. We then can work on guidelines for what factors constitute high and low risk. To avoid rejection, tax authorities should also have accurate data. Taxpayers cannot deny it when the data shown by tax authorities is accurate.

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